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Chapter 3: Q13BP (page 187)

In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will earnings after taxes be?

Short Answer

Expert verified

The earnings after taxes will be $416,400

Step by step solution

01

Information given in the question 

The following information is provided:

Long-term interest rates = 6%

Short-term interest rates =11%

Earnings before interest and taxes = $996,000

Tax rate = 40%

02

Calculation of interest expense 

The interest expense is $302,000.

Interestexpenses=Long-terminterestexpense+Short-terminterestexpenses=($3,200,000×6%)+($1,000,000×11%)=$192,000+$110,00=$302,000

03

Calculation of earnings after taxes 

The earning after taxes is $416,400.

Earningsaftertaxes=Earningsbeforeinterestandtaxes-Interestexpenses-Taxes=$996,000-$302,000-$277,600=$416,400

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Most popular questions from this chapter

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.

b. How many orders will be placed during the year?

Eastern Auto Parts Inc. has 15 percent of its sales paid for in cash and 85 percent on credit. All credit accounts are collected in the following month. Assume the following sales:

January

\(65,000

February

\)55,000

March

\(100,000

April

\)45,000

Sales in December of the prior year were $75,000. Prepare a cash receipts schedule for January through April.

Explain how rapidly expanding sales can drain the cash resources of a firm.

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

c. Determine a cash payments schedule for January through December. The production costs (\)1 per unit produced) are paid for in the month in which they occur. Other cash payments (besides those for production costs) are $7,400 per month.

By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.
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